THE NATION : THE ECONOMY

Bush's Tax Logic: If A, Then B, Even When C

March 18, 2001|David Mermelstein | David Mermelstein, professor of economics at Polytechnic University in Brooklyn, is the editor of "The Economic Crisis Reader."

Second, even if the stimulus came when the economy is recovering, unemployment, an effect of recession, would presumably be high, certainly higher than it has been recently. What's wrong, then, with a little extra fiscal oomph? The answer given is that inflation will rear its ugly head. But inflation didn't rear when unemployment recently got down to 4%. Until it is shown otherwise, a stimulus that would bring unemployment down to levels lower than 4% should not be avoided because of a fear of inflation. If and when the devil appears, the Fed can exorcise it by raising interest rates.

A fiscal stimulus, then, may indeed be appropriate, as Bush has argued, but if that is what he truly seeks, he would be well-advised to drop his proposal for ending the estate tax, which would provide nothing in the way of a stimulus. Second, instead of lowering rates on the highest-income class from 39.6% to 33%, he should agree to tilt his cuts toward the lower half of income earners, where the stimulus, dollar for dollar, would be greatest.

Finally, unless a tax cut for the wealthy is the be-all and end-all of his politics, Bush should compromise and spend a prudent amount of the surplus on health, education and Social Security, which is what most Americans want. In general, a fiscal stimulus can come either in the form of a tax cut or a spending increase. Both do the job.

What's prudent? The surplus, while large now, will diminish considerably, even without a tax cut, given the sluggishness of the economy, and disappear altogether with a recession that has staying power. To deal with this contingency, some have advocated a trigger mechanism that would rescind the tax cut whenever a specified level of budgetary surplus was threatened. Ironically, such a trigger could result in a phantom tax cut. That is, the economic circumstances that are unfolding would cause the trigger to undo what was just enacted. For this reason, it is highly unlikely that the Bush administration will agree to an automatic mechanism that places at risk what it most wants to accomplish.

Beyond its immediate role as a stimulus, a budget reflects a nation's priorities. A humane society doesn't stint on the education of its youth or the health needs of its citizens; nor does it jeopardize the well-being of its elderly. These are all priorities a compassionate conservative can embrace. Only by reordering his priorities, can Bush be what he claims to be. *